For all of you who have just graduated from college or completed a course of study; congratulations. We hope your job search is over quickly and successful both in terms of payment and satisfaction. Keep in mind that while you’re looking for work and trying to save every dime, your student loans are waiting for you.
Federal Student Loans (and most Private Student Loans) come due six months after graduation or finishing a course of study (trade schools, etc). Before you get that first payment notice in the mail, you need to know what your monthly payment will be along with some basic information on your loan structure.
“I Owe How Much?”
First off, know what your payment will be. If you’re thinking that it’s around $100 and is actually $150; that wipes out the money you thought you had to go to the movies every month. Know what it is down to the penny and you can budget with confidence. Also, understand how long this is going to take. If you have a loan term of ten years, then you’ll know how long it may be before you can consider buying a new car or purchasing a home.
Next understand what your Amortization Schedule means. This breaks out what your monthly payment is in terms of interest and principal. In the first few years, the amount of interest paid will be much higher than the amount of principal. For example, a $150 payment could be a total of $140 in interest while only $10 is actually paid back against the loan amount. This is how a $10K loan turns into $15K before everything is paid back.
The only way to reduce the amount of interest you’ll pay over the term of your loan, without restructuring the loan itself, is to pay more than the monthly requirement. If instead of $150, you can pay $162.50 every month; that means you’ll have made a total of 13 payments each year. This lowers your payments near the end of your loan and may even shorten the loan term.
No Job? Don’t Panic! Be Prepared!
If the next six months come and go with no employment or you find yourself underemployed with a part-time job, then you will also need to know about loan deferment and loan forbearance. Loan deferment basically hits the pause button on your loan schedule. It postpones the repayment schedule for a certain amount of time on all federal student loans. Interest that is unpaid during this period may be added to the principal of the loan which would extend the loan term. In the case of Direct Subsidized Loans, Subsidized Federal Stafford Loans and Federal Perkins Loans, interest does not accrue or continue to build while the loan is under deferment.
Loan Forbearance is a period of time when loan payments can be temporarily paused or reduced. This option should be more attractive for students who are working and want to pay on their loans, but find themselves overwhelmed by the monthly payment amount while trying to keep a roof over their head. Like with deferment, unpaid interest that accrues under a period of forbearance will be added to the principal amount.
(Disclaimer: This site is not providing legal advice here, but rather providing information aggregated from publically available sources) If your financial status becomes so poor that you consider bankruptcy, remember that a standard bankruptcy court does not cover student loans. In order to have these loans discharged through bankruptcy, they must be judged through separate proceedings. It is another area of the law regarding student loans that needs to be reformed. We have detailed the requirements to have this accomplished previously here.
A much better plan, especially if you are unemployed, is to contact your lender about restructuring your student loan. Three of the best options are the Income Based, Income Contingent and Pay As You Earn repayment plans.
Income Based Repayment (IBR) is noted by the forgiveness of three years of unpaid interest and then the possibility of qualifying for a monthly payment of as little as $0. Those who qualify will never pay more than 15 percent of adjusted gross income over the poverty line. This is determined annually and the size of your family is also taken into consideration.
Income Contingent Repayment (ICR) is similar to the IBR, but is recommended for those applicants who do not expect to generate additional income in the future. With ICR, the size of the loan is not considered in determining a new monthly payment. This is especially helpful for applicants who do not expect an increase in their income in the foreseeable future. More information for ICR and IBR can be found on our website here.
Pay As You Earn (PAYE) is a new program that covers repayment of Direct Loans. Although they cannot be repaid under PAYE, a few types of Federal Family Education Loans can be considered when determining if an applicant is qualified. Applicants must be a new borrower to the student loan program on or after October 1st, 2007. More information on PAYE can be found at the Student Aid website.
Success and Moving Forward
The keys to success immediately after graduation are preparation and staying ahead of any potential problems. This is especially true when repaying student loans. To protect yourself, your credit rating and your financial future, learn everything you can about your student loans. If financial problems do arise, the first step is to contact your loan holder and begin the process to restructure, defer or seek forbearance for your loans. Helping you with that is our business here at Student Debt Relief. You can call us at 1-866-921-8053 or ask any question here.
Congratulations and Good Luck!